What Unsustainable Growth Looks Like: Herbalife, Groupon, and More
data.heapanalytics.com
data.heapanalytics.com
I hope this doesn't come across as nitpicking, but the lead sentence of the article is incorrect. It should be:
One of the most important characteristics of a successful STARTUP is that it's growing.
Businesses which successfully serve their owners, employees, customers and larger surrounding community, can easily be steady-state.
I realize HN is startup-focused, but I think in the interest of productive conversation it's important to make the distinction and use precise terms.
Costs always increase -- staying the same size costs more next year.
Even so, due to older staff retiring or leaving and newer staff joining at lower salaries, even if all staff have steadily increasing pay rates above inflation the overall payroll budget may still be in a steady state.
You mean, grow?
But that setup only applies if you're paying at the bottom of the scale and not giving out benefits. Bennies have been increasing by much more than inflation, and the type of jobs giving bennies typically expect a 4% raise, minimum, if you're doing acceptably at it.
The cost? An ever increasing chasm between powerful and powerless, a chasm which itself goes through periodic crashes which tend to be significantly more violent... e.g. the fall of Rome, the French Revolution, and WWII.
If growth is so important and defines success then eventually is will plateau due to limited resources and no longer be successful which is obviously not true.
To place both of those ideas into one, the most important characteristic of a successful business is a positive return on investment. Profits and growth can account for a positive return on investment.
For public companies, growth is important, because people who buy a share of stock for $X do so because they think that share of stock will someday be worth an amount more than $X. And growth is seemingly a very clear indicator of such an outcome. So the markets put pressure on public companies to always be growing.
That is why stock buy-backs only make sense if the shares are priced too low.
(That said, I do understand companies usually overpay for their own stock, so the move is not necessarily the best one for any given company or companies in general unless the stock is, in fact, undervalued. But it is still one way to deliver returns into the pockets of shareholders, anyway.)
If a company buys back stock that is overpriced, it actually destroys shareholder value. If the stock is priced correctly the outcome will be neutral for the shareholders. Only in the case where the stock is cheap relative to its value, is value created for the shareholders.
In reality these corporate actions are value neutral if the current share price is at fair market value.
The value of ongoing profit is reduced if a company has fewer liquid assets to invest.
That is actually untrue.
One theory says that a business should grow with GDP.
Comparing to GDP gets tricky. Is GDP growing due to actual output growth and wealth generation or due to inflation?
I suppose we need to first agree on what were looking at defining what a successful business based on a non moving target or defining success based on comparing it to other businesses.
Do I think a businesses revenue should grow with GDP? Yes. Does the profit margin need to? Not necessarily. To be more successful at investing you definitely want businesses that have higher ROIs. However, are we discussing successful investing or successful businesses?
Edit: typos
"True" GDP should be inflation-adjusted, hence you'll see real GDP growth in adjusted statistics.
Measuring inflation is its own kettle of worms.
The more relevant challenge IMO is that GDP is a highly flawed measure. NNP (net national product) corrects for some of this via accounting for externalities, but both are still cash flow measures, when what would be more appropriate as a net measure of wealth would be a capital growth account -- equivalent to a businesses balance sheet.
Sadly, this is one area in which macroeconomics has been stubbornly and persistently lacking.
Growth depends on resources AND technology. Its quite possible to have growth without any change in resourcing.
> Comparing to GDP gets tricky. Is GDP growing due to actual output growth and wealth generation or due to inflation?
It doesn't make a difference. In this case we are definitely talking nominal growth.
My bottom line would be that a business would generally(!) not be classed as successful if it is not growing.
Of course there are other factors that might make a stationary business considered a success.
That presumes that 1) GDP can grow without limit and 2) that GDP is itself an accurate measure of real economic growth.
Being technical about it, a business may keep up with inflation by raising prices, and show nominal growth.
Look at the revenue of a liquor store, insurance business, or tv / radio station, in a healthy but smaller settled market. No market growth, little to no business growth, but the businesses aren't likely to disappear either. This is a very common scenario, there are millions of US businesses in this situation.
More accurately: they're earning normal economic profits. This assumes that economic activity is normally profitable, which isn't unreasonable in certain circumstances, though it's not guaranteed.
There are natural monopolies which grow without apparent limit, or rather, whose growth is constrained only by the total size of the market, rather than some lower bound. For these, there's always the capability of adding additional profitable production.
For other businesses, there are natural constraints on scale: a regional market or operation which can only sustain so much business, high scale-related costs, etc.
As two canonical examples, telecommunications scales quite well with scale, and in the history of telecoms we find a long history of monopolies: Western Union in the telegraph age, AT&T in the telephony age, and now Comcast in the broadband era. Once you've got cables strung, your primary limitation is last-mile wiring. But it's the long-distance and total bandwidth capacities which give you maximum value.
Concrete is a counterexample: there's a limited local market (whatever local building activity will support), and your transport costs are very high: concrete is heavy stuff. Concrete tends to be a pretty localized industry, though it might be possible for a single firm to develop out of what are essentially multiple regional markets.
Growth, where possible, profitable, and sustainable for a business, is often pursued, but it's not a necessary condition for success.
Individuals working there are always excited about personal empire building of course, but if the stated community need is being met, well, that's good enough, in fact if that need is dropping that can sometimes be awesome.
Stereotypical orphanage or red cross or homeless shelter.
Churches are another business that often is fairly steady state plus or minus population changes and inflation.
Of course non profits can experience explosive growth, my credit union is a non-profit coop and since the nationwide banks have gone into decline with exploding fees and imploding services, the CU has recently had exploding growth rates. Which admittedly has a lot more to do with external societal factors than internal goals.
When a tech company demonstrates declining growth, there are usually negative murmurs that seem to get amplified in the news. It's still positive growth... but the growth derivative is negative. A flat, zero derivative seems to be as concerning to those in the press as a negative one.
For example, see stocks in utility companies. Particularly before recent deregulation in utilities, there were no prospects for growth in these companies, so their share prices were essentially based upon their bond-like characteristics of yielding a reliable dividend. Their price settles to a place where their dividend yield reflects the underlying "default risk" of the company, relative to the risk free rate.
At the risk of oversimplification, stocks usually fall somewhere on this spectrum. A high growth stock's price can be held afloat via rosy predictions of future growth, and a low or non-growth stock's price can be held afloat by a steady dividend stream. Take away the growth prospects of the former or increase the risk of losing the dividend stream of the latter and you will see the price drop precipitously.
Like our local taxi company basically has a monopoly on the city, and has no real reason to grow. But here comes UberX, a growth startup, throwing around free rides and cheap rates. If the local company loses market share or profits to UberX, they have nowhere else to pick it up.
After some research I had put my comments under this review of the neurs setup and how it seems to work. http://avoidonlinemarketingscams.com/what-is-neurs-is-it-the...
Now I play in the same space as my USP is to connect warm leads to companies via incentives. Looking at their videos they claim to connect Entrepreneurs with providers( leads in my world). So I did my research and found they have atleast a few 100k's of pageviews in the past few months. I am trying to decode their marketing tactics to figure out the do's and don'ts. Would like to hear what others think about it.
In the early 2000s I was living in Minnesota during the much-hyped arrival of Krispy Kreme. There were long lines at new stores and lots of doughnuts in the office every day. The hype prompted new franchises and an overabundance of doughnut shops, but unfortunately the demand dropped as the novelty wore off, and they ended up closing several stores and production facilities in the area.
Obviously Krispy Kreme weathered its over-expansion and is doing well today. I think the question for Groupon and Herbalife is if they have a business plan (and the financial reserves) to make the shift from exponential growth to more measured success.
The similarities with tech startups exist, including overambitious growth plans.
(summary: lots of people have lots of money invested in whether Herbalife is a pyramid scheme or not, and are lobbying hard on that.)
And the reason why churn is so critical for cash-strapped startups is that new customers are so expensive. In many cases it is an order of magnitude more expensive to sell to new customers than existing customers.
Even the ficticious waffel
Facebook recently posted a 72% year-over-year gain in Q1 revenue, is stealing share of the online ad market from Google at a slow but increasing rate, and is growing mobile ad revenue by 30% year-over-year.[1]
It's not doing that just by introducing new ad space and new ad formats. It's not doing that by bleeding out existing advertisers. As much as we might not want to admit it, Facebook is becoming a pretty compelling advertising platform. This was not always the case. But the company's ad platform is maturing significantly. It's got a long ways to go, and it's not perfect by any means. But there's a lot of potential yet to be tapped, and by all accounts, the company is making progress in tapping it.
News of Facebook's supposedly declining popularity is also premature and exaggerated.
[1]http://online.wsj.com/news/articles/SB1000142405270230338000...
Maybe, but just a bit over a year ago they used to have two ads on the right hand side of their desktop version. Now they have seven ads in the same space. They also used to have one mobile ad in their news feed. Now they are sideways scrollable (I think there are five in total). The fanpages' organic posts are reaching fewer and fewer people in an attempt to make the owners pay for as many promoted posts as possible.
A point I noticed in their last earnings report reminded me of the reasoning in the OP's post: one of the signals of decelerating growth is the loss of popularity of early products. Their desktop ad business accounts for less than half of their revenue nowadays, despite the fact that there is a lot more ad space available there.
Just because a blog says something, doesn't automatically make it true.
Your article doesn't speak to the efficacy of Facebook ads, does anyone have recent analysis on if the maturing Facebook ad platform is any better for getting clicks than their early efforts?
E.g. I'll happily pay $100 per click for if traffic has 50% conversion for a product that has a 1 year profit of $300. If conversion is 0.1% like some apps I'll still buy traffic but bid $0.20 for clicks. Even if the app has 10 times the clicks they will not earn as much as FB. Linking the right ads to the right people is the key for value/profit.
Bit of a submarine there, eh? Anyway, this doesn't make a case against Herbalife. In fact, it suggests that their data is saying the opposite. Look at the part where they talk about popping:
> Along with Japan and Israel, this same pattern shows up in Spain, France, Germany and several other countries that Herbalife has entered.
Now look at their chart of # of countries against revenue. Herbalife is apparently up to almost 80 countries. Even back in the '90s, they were in 20-50 countries. Let's be generous and say that 'several other' is 5 (I don't have the patience to go through Ackman's propaganda), and note that this will be an exhaustive list since it's being assembled by people with literally hundreds of millions of dollars of incentive to make the picture look as ugly as possible; that's 10 countries that 'popped'. Out of 80. If the other 70 have not popped, that does not seem like Herbalife will have problems in the future.
(There's also the problem that if each country can only be soaked for a short period before 'popping', revenue should not be regularly going up! It should be flattish as Herbalife desperately opens up ever more countries to replace disappearing revenue from the popping countries.)
When a majority of your customers are being unknowingly screwed over as you reap a huge amount of unnecessary producer surplus, it's a losing proposition in the end. Companies like Herbalife can just do it on a scale where it takes a long time to fizzle out.
Management Quality: If you read the really long presentation linked to in the article, they seem competent, but sketchy.
Retained Earnings: I have no idea.
Competition: Direct selling shitty looking health shakes? The seem to be reasonably well established.
History: It's been applying the same trick all along. Not much to go on here.
Input Costs: Well under control. Good.
Market Differences: They seem to be quite good at entering into different markets, so this goes well for them. It might be interesting if they could diversify their product lines.
Product Quality: Problem here, as I don't see what distinguishes them other than sales talent.
Quick PEST analysis:
Polictical: Problem. It's could be described as a pyramid scheme.
Economic: Economy seems to be picking up, and it does not strike me as a good that swings too much with the economy. However, they could have problems recruiting sales staff in a better economy.
Social: Health food is a trend that I think will continue.
Technological: Not really an issue.
For example I live in Brazil, I saw Herbalife going all the rage some years ago, then I saw people getting fat all the rage (ignoring whatever health claims Herbalife makes, when you take MORE food, whatever food it is, even if it is lean food, you still get MORE calories... eating your food + herbalife will make you fatter...), then people got upset with Herbalife results and dumped it.
Also I remmber very clearly that the most strong users were also the strongest sellers, the "end-buyers" usually bought only once.
Again, that's seriously unlikely. Ackman & co have literally hundreds of millions of dollars worth of incentive to list every country they can where Herbalife has failed. If anything, we should expect their list to be inflated & overstated.
> then people got upset with Herbalife results and dumped it.
So? That's like people talking about how they've dumped Facebook; what a few people think may bear little connection to reality. It's like Yogi Berra said: 'no one goes there anymore, it's too popular'.
Groupon, IMO was a trend. Trends have a ballistic trajectory. The reports of hard selling and unhappy customers confuse the issue, but I think the heart of the problem was that Groupon was popular for a while and now it's less popular.
Our default business systems don't know how to deal with that kind of a thing. A company with a 2 year half life. All our financial systems and our valuation of companies are built around companies that are lang lived, practically immortal (in the sense that impacts net present value). But, not everything is like that. A film or a computer game is often produced by a firm that forms and the disbands to create a single thing. It has all the things a normal company has: employees (including some highly paid stars), investors, assets, liabilities, etc. It only exists for a short time.
Crocs was like that too. A product that made a splash, sold a lot of brightly colored shoes at a great margin and then contracted.
I think the problem with Groupon wasn't Groupon. The problem was the whole system trying to treat it like Strabucks when it was more like Star Wars. Star Wars wasn't a failure because it stopped making money.. ..wait. Bad example. Exceptions prove the rule.
Financially, a company is the NPV of all its future cash flows. In practice, the system assumes those cash flows will continue steadily forever, growing if the company is healthy. If they try to swallow a company that will exist for just 4, they choke.
I think we need to be on the lookout for things like this. The world is getting fast paced. Maybe we need to be able to deal with 4 year companies.
It had high user turnover masked by a an even faster growing user base. At least until the potential user base dried up.
Agree though that there is a difference between a pyramid scheme (Herbalife imo) and a fad (Groupon) though they have similar growth trajectories.
There are lots of startups that could arguably be considered fads e.g. snapchat, it's yet to be seen whether or not it's a novelty or solving a basic human interaction problem as Facebook did.
It makes sense, given that VCs are often betting on big buyouts. This is the "castle in the air" theory. At some point, I think the pendulum will shift into investing in companies, that while they may not have cashflow here and now, at least have the potential to generate cash.
http://www.nytimes.com/2014/03/10/business/staking-1-billion...
> In Washington, Mr. Ackman’s efforts bore fruit on Jan. 23, when Mr. Markey’s office, which Mr. Ackman had lobbied himself and which had been provided with detailed information about Herbalife by Mr. Ackman’s team, sent letters to the S.E.C. and F.T.C., calling for investigations of the company. A little more than a half-hour after the stock began trading that day its value fell by 14 percent.
You could say that Ackerman sincerely believes the company is bad and is pursuing this for the greater good. The $1 billion is just putting his money where his mouth is. And his mouth just happens to be near a Senator's ear....
http://www.cnbc.com/id/100953220
"Ackman was the primary engineer and architect of recruiting Ron Johnson to the company, and he and Ron Johnson pulled off this strategy that has fractured the company and ruined the lives of thousands of J.C. Penney employees and fractured shareholder value," Howard Schultz, CEO and Founder of Starbucks and JCP Board Member
Given a large enough investment this could easily get you from series 'A' to the next round with spectacular figures showing really nice graphs.
It can be quite a bit of work to figure out where the flaws are, and founders are not always aware of issues like these.
>Eventually they’re going to run out of countries to enter, and that will be the end of Herbalife if they don’t figure out a more long-term, sustainable business model.
This statement is pure speculation. Why hasn't any of the same analysis been done on Groupon? I'm not sure why the article conflated the two stories of Groupon and Herbalife, when their data sets and underlying assumptions are clearly very different.
> You should be able to demonstrate sustained growth in a single market segment, whether it's a geographic region, a certain type of customer, or something else.
Isn't this why diversification exists? Why companies like GE, P&G, and now Google, have a massive portfolios of companies, as opposed to one single product that drives all growth? I'm having a hard time understanding what the takeaway is here...
They did the emerging markets growth strategy and it worked to help juice their numbers for a few years until Android and iOS totally destroyed all but their core customer base.
The real danger in this strategy is not that it grows an unsustainable business, just that the sustainable portion is much smaller than the peak and if you forecast up and to the right growth forever, it eventually doesn't happen and you have budget shortfalls and layoffs.
Hyper growth is exciting and gets you headlines, but sustainable, steady growth is probably a happier long term situation for moth businesses.
There is a lesson to be had from Blackberry's decline but its not the same as Groupon /HerbalLife /Fried waffles.
My first smartphone was a Palm Treo and it didn't take me very long to switch to a Blackberry.
It's hard to imagine if your only experience with smart phones is with iOS and Android devices, but from 2004 until the iPhone in 2007 (and really, the iPhone 3G in 2008), Blackberry was the industry standard for smart phones. Even after the iPhone was released, it still took a few years before people generally accepted touchscreen keyboards. If you look at the early responses to the iPhone, you'll see that was one area where competitors tried to attack -- Palm with their Pre that had both touch screen and a slide out keyboard, and the very ill-advised Blackberry Storm that had a touchscreen you could press in.
And actually, there are still loyal holdover users from Blackberry's prime days who still swear by the Blackberry for it's ability to handle mobile email. They all realize Blackberry's are inferior to iOS and Android devices but the Blackberry's are still what they know and still fit well for what they want to do.
Does anyone have examples of similar businesses to the aforementioned? Curious how much of a trend this actually is.
My startup is struggling to have profit (we have revenue, but no profits yet, although we have growth of revenue), and many, many, many times we felt tempted to pull that sort of stunt (pyramids, freemium abuse, shady ads, etc...)
I've found a lot of interesting things (restaurants, various shops) that I wouldn't have found otherwise through GroupOn and peers. To each their own.
1. Businesses need more customers
2. Customers want cheaper stuff
I'm just not sure that linking the two solves either problem. You've got cheapskates taking up deals and never coming back.
I can't recall the exact figures but the way Groupon's deal worked when they pitched me was a definite loss-maker. Groupon took their portion, the customer was required to get a massive headliner discount to make the deal look attractive. Effectively Groupon's proposition was for us to swallow a big loss to send them revenue.
I like a bargain but if the "bargain" means that a third party profits whilst I get to help send local businesses under then I can't take that offer. Sure for some types of business Groupon can work but they don't [didn't] only target those businesses.
Demanding unsustainable prices is "cheap" because it's not a proper saving. You end up paying for [your share of] the social welfare payments for the people that go out of business and the businesses no longer exist to serve you.
Though, unfortunately, before it crashes entirely - those handful at the top will have their next big sham ready to seed & perpetuate into the world; and a significant number of the dupes who were duped before will be duped again.
And hence, the endless, relentless cycle of MLM. Despicable.
The data in this article shows some trend in two countries 10 years ago and then draws some grand conclusions on the business model, which is absurd.
If you look at the business fundamentals, the picture is a bit different.
Herbalife sells high quality products, used happily by millions of permanent customers worldwide.
They are leaders of one of the hottest industries - wellness. Looking at the amount of unhealthy food sold in supermarkets today (almost all of it), it's no wonder there are entire industries trying to fix people's health after consuming the food sold to them. The other industry is Health Care.
Now the MLM thing.
All the 'those on top earn everything and new people earn very little' is both true and fair. The fact is, no one has appointed anyone on 'top', everybody starts out as a simple distributor and builds his/her business from the ground up. It's a tough business and only the best (most motivated) move up and others move on with their life. Just like any other business.
I have been there when my sister started in Herbalife 20 years ago. She started from zero, as a simple distributor. Now she earns about $100k/month plus bonuses, drives a Porsche and lives in an incredible house on top of a mountain.
What's more, she made dozens of other people rich. I know them all personally, they started from owning one set of clothes to driving expensive cars and travelling all around the world.
And thousands upon thousands of customers who changed their lives after loosing a significant amount of weight. These are the customers that don't go away easily, not after they have been reborn. Anyone who has lost 20+ kilograms (like myself) knows what I'm talking about.
Bill Ackman is full of shit and a hypocrite when he states that he wants to help millions of low income people from loosing money with Herbalife.
It's a personal and emotional war he's engaged in and so far he has been loosing it, because his premises are wrong.
Fluctuations of investor expectations (i.e. stock price movements) have especially nothing to do with this article's analysis. It presents data and comes to a pretty reasonable conclusion from it. Whether you wan't to call it a "pyramid scheme" or not is semantics, the conclusion speaks for itself.
Short-term investors can make money betting in the opposite direction of long-term investors who will also eventually make money. Herbalife can be a pyramid scheme and short-term investors can make money as the stock price rises -- the 2 aren't mutually exclusive.
http://www.cnbc.com/id/101606593
http://abcnews.go.com/Blotter/herbalife-ackman-respond-night...
(I am a Wikipedian, and in general I don't trust Wikipedia for current news AT ALL, and especially not for current news that touches on health-related businesses.)